Bank of Queensland's recovery from the loss it suffered in the interim half last year is still on track, although the bank concedes its commercial loan arrears are still too high.After reporting a loss of A$90.6 million for the six months to February last year, BOQ made a net profit of $73.5 million in the August half. Yesterday, the bank reported a net profit of $100.5 million for the latest half.BOQ's chief executive, Stuart Grimshaw, said: "We have worked hard to re-establish our business fundamentals. Costs are under control and asset quality is improving."Grimshaw, who has been BOQ's CEO since November 2011, has shaken the place up. For example, 80 per cent of the direct reports to the head of business banking were new to the bank in the latest half.The bank has also reduced its costs by moving to a shared services model. The cost-to-income ratio was reduced from 46.4 per cent, in the second half of last year, to 44.7 per cent in the latest half.Grimshaw has undertaken a comprehensive lending review, and, as a result, most of the problem commercial loan exposures have been "washed out".Six of the bank's top 10 loans were new business during the half and all are performing. In February last year, three of the top 10 loans were impaired and one was on a watchlist.BOQ's chief financial officer, Anthony Rose, said the bank had smaller exposures, better loan security and better procedures for identifying problems.However, Rose added: "Commercial arrears are still elevated. The SME market is still stressed."Operating conditions were subdued, in line with weak demand for credit. Housing lending assets increased by an annualised rate of 3.7 per cent over the past six months (0.8 times system growth). Commercial lending assets increased by an annualised rate of 2.8 per cent.Net income was up three per cent on the previous corresponding period, and the net interest margin of 1.66 per cent was up two basis points. Non-interest income rose seven per cent.The big change was the bad debt charge, which fell from $327.7 million, in the first half of last year, to $59.5 million in the latest half. The ratio of impairment expenses to gross loans has come down, from 194 basis points in February last year to 43 basis points in August, and now to 34 basis points in the latest half.Impaired retail assets have fallen from $214.6 million to $172.9 over the past six months. Commercial impaired assets have fallen a little, from $284.4 million to $281.6 million over the past six months. The ratio of impaired assets to gross loans and acceptances is 137 basis points.Despite the improvements, BOQ's asset quality does not compare well with its competitors. Bendigo and Adelaide Bank's ratio of impaired assets to gross loans and acceptances is 59 basis points, Suncorp Bank's is 47 basis points and Commonwealth Bank's is 79 basis points.The bank's provisioning level (collective provisions plus general reserve for credit losses as a percentage of risk-weighted assets) also remains above that